Tesla Motors, the manufacturer of one of the most successful electric cars launched in the US, reported its third quarter earnings. The company topped revenue estimates but failed to meet EPS estimates. More importantly, the company managed to top market estimates for delivery of its flagship product, Model S, which is supposed to yield 90% of the revenue for the company in 2012.
Losses increased from $65 million to $110.8 million. However, the press release came with some positive surprises as well for investors. The company delivered 253 Model S cars this quarter, more than the 230 deliveries expected by the sell-side. Deliveries are a critical indicator for investors because the revenue recognition policy of the company mandates that revenue be recorded only when the car is delivered. Earlier on, the company had given a production guidance of 500 cars in the third quarter and a total of 5,000 cars in 2012. According to that guidance, the company would have made its first dollar in profit in the second half of 2013.
However, due to supply chain issues and more focus on quality, the company reduced the guidance to 2,500-3,000 deliveries for this year. This meant that TSLA would take more time before it makes positive earnings. In a blog post, a couple of weeks ago , CEO Tesla Motors Elon Musk remarked that the company is currently at the steepest portion of the production ramp and, therefore, appears to be much further behind than it actually is. The company disclosed today that it has achieved a production rate of 200 cars per week, which means more than 10,000 cars per year. At the current rate, the company would easily achieve its guidance of 2.5k-3k. Achieving a rate of 200 cars per week implies that the company is well on its way to achieve a rate of 400 cars per week in 2013, which translates into total production of more than 20,000 cars in the next year.
However, another thing that bothers investors is the liquidity position of the company. The company has already gone through a second phase of shares offering. At the end of the quarter, the company had $109 million in the cash till. The shares offering, executed after the end of the quarter, brought in an additional $222 million to equip the company with total available cash of $330 million heading into the fourth quarter. The company has already completed its draw down of a $465 million loan facility. As mentioned in one of our previous articles, Tesla violated some loan covenants that the DOE had set. However, DOE let TSLA off the hook on the condition that it would pay the loan in advance of the schedule that was decided when the contract was signed. In this context, TSLA told its investors today that the company has already made the loan payment that was due in March next year and it plans to maintain a strong relationship with DOE in the future.
Moreover, the company expects to make positive free cash flows by the end of next quarter. However, a Morgan Stanley analyst thinks otherwise and claims that this is another of Elon's overly-optimistic targets. Cash estimates topped sell-side estimates; however, the company still consumed $165 million of cash in the third quarter.
With every passing day, we are reassured by the fact that Tesla's Model S does not have a demand problem. Bloomberg Businessweek recently declared Model S to be as fast as any supercar it has ever been tested against. It accelerates from 0-60 mph in just 4.4 seconds. The net reservations of 13,200 cars also topped sell-side estimates of 13,100 cars. The company made almost 2,900 new reservations, 30% more on a YoY basis. However, bears highlight that cancellations are on a rise as well. Nonetheless, net orders increased from 11,500 at the end of Q2.
The company is also working to improve its coverage of service centers, as mentioned in the previous article on TSLA. By the end of the year, more than 85% of reservation holders of the Model S will be within a 50 mile radius of a TSLA service centre, and more than 92% will be within a 100 mile radius. The company's supercharger policy has also been appreciated by customers. The facility, which has been installed at restaurant corners for the most part, will provide an additional range of 165 miles through a 30 minute recharge. This means that a Tesla owner can have lunch and recharge his/her car at the same time.
The company maintained its revenue guidance of $400-440 million for 2012. Current gross margin of 17% was in line with expectations. However, the company expects margins to improve significantly in the next quarter due to the improvement in volumes and planned cost reductions. R&D is expected to remain flat for Q4. CAPEX will be around $240 million for the year.
A Morgan Stanley analyst believes that the company's revenues will multiply 14 times in the next four years, 40 times by 2020, and 70 times by 2026. Given the huge upside and ramp-up in production facilities, the stock is recommended as a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Qineqt's Industrials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.